"Consolidation is likely to continue, but perhaps not at the current pace," Marcon said, noting that the 65 property/casualty mergers in each of the past two years were double the 1993 figure. Last year's deals were valued at $8.6 billion, two-thirds more than 1994's, and 3-1/2 times 1993's.

Insured catastrophe losses since 1989 totaled $75 billion in today's dollars — 50 percent more than all insured catastrophe losses in the previous 39 years, Marcon observed. If catastrophe losses had been at typical levels, the 1994 combined ratio would have been 103.1, instead of 108.5, and the 1995 combined ratio would have been 105.6 instead of 107.2.

Citing an upcoming ISO study of the financial impact of catastrophes, Marcon said a single hurricane or earthquake megacatastrophe — though highly unlikely — could exhaust, and perhaps even vastly exceed, many insurers' ability to pay their claims. "The threat of catastrophe losses beyond the industry's capacity to pay claims has driven insurers to adopt innovative financing approaches that go far beyond traditional risk-spreading as we know it," he said.

Some of those approaches involve seeking capital from outside the industry, from government intervention, or both, Marcon noted. Innovative approaches include securitizing risks through financial instruments such as catastrophe insurance options and "act of God bonds." Another new tool is the risk swap — insurers' exchanging a variety of risks to balance their total exposure, according to Marcon.

Government initiatives awaiting legislative approval include the federal Natural Disaster Protection Partnership Act, which would create an insurer-financed and privately managed national insurance pool, and the California Earthquake Authority, a $10.5-billion facility involving funding from insurers, reinsurers and private capital markets.

Environmental and asbestos liabilities "are catching up with the industry," Marcon said, noting that in 1995 six insurers alone added $5 billion to their reserves for environmental and asbestos losses, adding nearly 2 points to the industry's combined ratio. ISO estimates that the industry carried $18 billion to $20 billion in loss reserves for environmental claims at year-end 1994, clearly not enough to cover even current, lower estimates of the industry's environmental liabilities, which could exceed $100 billion.

Marcon observed that reform of the federal Superfund law "has been caught in Washington gridlock." He advised that "until a national policy is in place that cleans up toxic sites while apportioning costs fairly and efficiently, the industry must keep the pressure on."

Besides catastrophe and environmental liabilities, Marcon also noted the industry faced a potential financial catastrophe if the recent bull market in stocks reversed, and prices fell appreciably. He recalled the industry's $10.2 billion of capital losses in 1973 and 1974, which amounted to more than 40 percent of the industry's 1973 surplus. Proportional capital losses today would amount to a $96-billion hit to surplus "from financial markets beyond your control," Marcon told the insurance executives.

Said Marcon: "Catastrophes, environmental losses, changing market conditions and the evolving — some might say, mutating — shape of the industry all make for a future that is uncertain. What is certain is that business as usual, which produced acceptable results for so many for so long, just won't get it done anymore. What will get it done is prudent planning and superior execution that meets the changing needs of your customers."